Yahoo Finance We Think Xtract Resources (LON:XTR) Needs To Drive Business Growth Carefully
We can readily understand why investors are attracted to unprofitable companies. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.
Given this risk, we thought we'd take a look at whether Xtract Resources (LON:XTR) shareholders should be worried about its cash burn. For the purposes of this article, cash burn is the annual rate at which an unprofitable company spends cash to fund its growth; its negative free cash flow. Let's start with an examination of the business's cash, relative to its cash burn.
View our latest analysis for Xtract Resources
How Long Is Xtract Resources's Cash Runway?
A company's cash runway is the amount of time it would take to burn through its cash reserves at its current cash burn rate. In December 2019, Xtract Resources had UK£361k in cash, and was debt-free. In the last year, its cash burn was UK£976k. That means it had a cash runway of around 4 months as of December 2019. With a cash runway that short, we strongly believe that the company must raise cash or else douse its cash burn promptly. You can see how its cash balance has changed over time in the image below.
How Well Is Xtract Resources Growing?
On balance, we think it's mildly positive that Xtract Resources trimmed its cash burn by 7.3% over the last twelve months. Having said that, the revenue growth of 51% was considerably more inspiring. We think it is growing rather well, upon reflection. Of course, we've only taken a quick look at the stock's growth metrics, here. This graph of historic revenue growth shows how Xtract Resources is building its business over time.
Can Xtract Resources Raise More Cash Easily?
Given Xtract Resources's revenue is receding, there's a considerable chance it will eventually need to raise more money to spend on driving growth. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. Commonly, a business will sell new shares in itself to raise cash to drive growth. We can compare a company's cash burn to its market capitalisation to get a sense for how many new shares a company would have to issue to fund one year's operations.
Xtract Resources's cash burn of UK£976k is about 18% of its UK£5.4m market capitalisation. As a result, we'd venture that the company could raise more cash for growth without much trouble, albeit at the cost of some dilution.
Is Xtract Resources's Cash Burn A Worry?
On this analysis of Xtract Resources's cash burn, we think its revenue growth was reassuring, while its cash runway has us a bit worried. Summing up, we think the Xtract Resources's cash burn is a risk, based on the factors we mentioned in this article. On another note, we conducted an in-depth investigation of the company, and identified 5 warning signs for Xtract Resources (2 are significant!) that you should be aware of before investing here.
Of course Xtract Resources may not be the best stock to buy. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying.
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This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned. Thank you for reading.
